Rule tweak slows FII inflow into corporate paper

RBI said in its monetary policy that incremental investment will be allowed only in bonds with tenure of three years or more

Dollar inflows into Indian corporate bonds have slowed dramatically after the Reserve Bank of India said in its policy that incremental investment will be allowed only in bonds with tenure of three years or more.

Foreign institutional investors bought $38.81 million worth of corporate bonds on February 3, the day the RBI banned investments into less than three-year tenure bonds. On February 4, FIIs pulled out $23.02 million from the domestic bond market.

This is in sharp contrast to the daily average of around $180 million that FIIs have been investing since January.

On February 3, the RBI in its monetary policy said that FIIs will have to make all their incremental investments in only three-year and above tenure corporate bonds. The investment limit in corporate bonds is $51 billion and FIIs have currently used up 69% of the limit.

“Even when incremental flows to government treasury bills was banned, we saw money flowing into long-term bonds. So, in corporate bonds too, FIIs will continue to put money,” said Ajay Manglunia,

Investments in government bonds, in which the limits of $25 billion has been exhausted, have already been restricted to bonds having maturity of above three years.

With the restriction of the three-year maturity, now FIIs cannot buy commercial papers of companies. Currently, FIIs hold $2 billion of commercial papers which is also the investment limit in CPs.

Bankers believe this slowdown in inflows is

only temporary and would soon revive as Indian bonds offer one of the highest yields among emerging market debt.

The 10-year benchmark government bond yield is trading at 7.70% while a top-rated corporate bond of a similar maturity is around 8.25%.